I remain a fan of Victoria Oil & Gas plc (LON:VOG), despite the series of delays and problems which have dragged its share price down to 1p territory over the last year.
The firm’s recent announcement that production has now reached 2.9mmscf/d should mean that it has reached operating cash flow break even, according to Chairman and interim CEO Kevin Foo, but what are the company’s shares really worth?
Victoria Oil & Gas is not a regular exploration and production company, whose value varies with every turn of the drill bit.
It is — currently, at least — a straightforward energy production and supply business, focused on producing gas and selling it, through its own pipeline network, to businesses in the Cameroon city of Douala.
On that basis, it seems reasonable to value it on earnings and cash flow, with a little extra thrown in for the value of its reserves.
Results provide earnings clues
The firm’s belated final results (published on 25/10 for a financial year that ended on 31/05) indicate that production of 4.8mmscf/d would translate to net monthly revenues of $1.8m. Set against this, Victoria says its monthly cash burn is $1.1m, providing operating cash flow of $700,000 per month.
Next year’s target is 12mmscf/d, which by my calculations would result in net monthly revenue of $4.5m, or $53.9m over a 12-month period.
The firm’s 2012/13 accounts showed total costs (finance, SG&A, etc) of around $22m, which would mean that sometime in the next 12-18 months, Victoria could move to a situation where it is on course to deliver a pre-tax profit of around $32m.
This equates to 0.7 cents per share, or around 0.44p, which would place Victoria’s current share price on a forward P/E of less than 3.
The reality, I suspect, is that 12mmscf/d could be a target that will slip into the 2014/15 financial year, and no doubt its costs will change and may rise as the business expands, despite a cost-cutting drive.
In my view, if Victoria’s business continues to grow, and the firm can convert positive cash flow into profits, an eventual P/E multiple of between 8 and 10 would be reasonable.
Looking ahead to the 2014/15 financial year — when I believe that Victoria’s investment in Cameroon will really begin to bear fruit — I reckon earnings of 0.4p per share and a share price of 3.5p – 4.5p is a realistic target, offering patient investors the potential for 300% gains from today’s share price.
What’s more, this target price discounts any value attached to Victoria’s West Med oil and gas field in Siberia, which it’s trying to sell, and the underlying value of the Logbaba gas reserves.
Victoria estimates that Logbaba has sufficient proven and probable (2P) reserves to supply 20mmscf/d until 2043 (30 years), which equates to 2P reserves of 219Bcf. Even allowing for a considerable positive skew to this estimate, that’s still a substantial field, and its proven commercial potential as the only onshore producing field in Cameroon could make it an attractive purchase.
I’ve recently increased my VOG holding and may do so further if the company continues to make good progress, in the meantime, I’m holding, with a target of 3.5p.
Meet the boss?
Finally, although face-to-face meetings with management are undoubtedly useful, they are not realistic for most private investors. However, video interviews with senior management, such as those published by Proactive Investors, can be helpful in providing some human background to the RNS announcements.
Proactive’s Jeremy Naylor recently interviewed Victoria OIl & Gas Chairman Kevin Foo, and it’s worth a look if you’ve got ten minutes spare:
Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.